Canada takes further steps to avoid U.S. housing crisisby Tim Manni
Even though Canadian officials say they see no signs of a housing bubble forming, they still decided to take steps to “cool” the housing market:
Canada moved on Monday to tighten its mortgage rules for the second time in less than a year, citing the need to prevent the kind of housing market problems that led other countries into financial crisis.
The new rules, designed to ensure Canadians don’t take on more debt than they can handle, took aim at mortgage amortization, refinancing and the use of lines of credit secured by homes.
Let’s take a look at exactly which Canadian mortgage rules were changed:
* Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 percent
* Lower the maximum amount people can borrow in refinancing their mortgages to 85 percent from 90 percent of the value of their homes
* Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit.
[Finance Minister Jim] Flaherty said the insurance had become “particularly risky” because some Canadians were using the lines of credit to buy things like boats, cars and big screen televisions.
“That’s not the business that mortgage insurance was designed for,” he said.
How did Canada avoid the mortgage crisis?
How is it that the housing markets in two bordering countries — which are similar in so many ways – have experienced such different market conditions? Besides the measures taken above, how else did Canada manage to avoid the foreclosure crisis that crippled the U.S.?
Canada and the U.S. have a lot in common. Both countries are wealthy, stable, technologically advanced democracies with highly developed financial systems. However, as many point out — including the Wall Street Journal, which also recently asked why Canada avoided a mortgage crisis — Canada has no Fannie Mae and no Freddie Mac. There is no mortgage interest tax deduction. There are no 30-year fixed-rate home loans that can be freely refinanced and prepaid. Mortgage lending is far more conservative, and Canadian mortgage lenders have a lot more recourse than American ones.
If Canadian homeowners default, their other assets and income are on the line, not just the property. Strategic defaulting is not an attractive option. There is more incentive to pay down mortgage debt because there is no tax deduction. Canadians mostly pay their mortgages electronically and automatically from their checking accounts — so extra effort must be made to actually miss a monthly payment. Canadian fixed-rate mortgages generally come with anti-refinancing prepayment penalties to protect lenders from interest rate drops, and the mortgage interest rates on these loans are fixed for a maximum of five years — an incentive to pay the debt down faster.
To learn more about how Canada managed to avoid the housing downturn, be sure to read “How Canada avoided the foreclosure crisis.’